How to Trade Butterfly Harmonic he butterfly market strategy like any other harmonic pattern is a four-leg reversal pattern that follows specific Fibonacci ratios. A proper harmonic Butterfly needs to fulfill the following three Fibonacci rules:
AB= an ideal target of 0.786 or 78.6% of XA leg;
BC= minimum 38.2% and maximum 88.6% Fibonacci retracement of AB leg;
CD= Poses a target between 1.618% – 2.618 Fibonacci extension of AB leg between 1.272– 1.618 of XA leg.
The B point of the Butterfly harmonic pattern is important because it’s determining other Fibonacci measurements within the pattern to define the trade opportunities. So, the ideal target for the B point must possess precise 78.6% retracement of the XA swing. Other rules that redefine the structure further include the BC projection that must be at least 1.618 measurements.
And, finally, the C point must be within the range of 0.382-0.886 retracement.
Step #1 How to Draw Butterfly Pattern To learn how to draw butterfly chart pattern simply follow step by step guide – see figure in chart for a better understanding of the process:
First, click on the harmonic pattern indicator which can be located on the right-hand side toolbar of the TradingView platform.
Identify on the chart the starting point X, which can be any swing high or low point on the chart.
Once you’ve located your first swing high/low point you simply have to follow the market swing wave movements.
You need to have 4 points or 4 swings high/low points that bind together and form the harmonic bat pattern strategy.
Every swing leg must be validated and abide by the bat pattern forex Fibonacci ratios presented above.
Step #2: SELL at Point D which should satisfy the requirement CD = 1.618 – 2.1618 of AB leg.
Step #3: Place the Protective Stop Loss at 1.618 of XA
Step #4: Multiple take profit strategy: TP1 = Point A; TP2 = Trailing SL below last swing high.